Residential Reinsurance 2012 Ltd. (Series 2012-1)

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Residential Reinsurance 2012 Ltd. (Series 2012-1) - Full details

This is USAA’s 18th catastrophe bond transaction.

Residential Reinsurance 2012 Ltd. is a Cayman Islands SPV established for the purpose of issuing catastrophe bond notes on behalf of USAA.

This Series 2012-1 deal will see them issue 3 tranches of notes seeking to secure at least $150m of fully collateralized reinsurance cover for USAA on an indemnity basis for a four year period. Each exposed tranche will be exposed to U.S. hurricane, U.S. earthquake, U.S. severe thunderstorm, U.S. winter storm and U.S. wildfire risks. The deal will provide USAA with a source of fully collateralized reinsurance cover on both per-occurrence and aggregate basis over a four year period. Indemnity triggers will be used for each tranche.

A Class 3 tranche of notes is sized at $50m currently and will provide per-occurrence coverage for the five perils. The Class 3, per-occurrence notes will attach at $2 billion of losses.

A Class 5 tranche of notes is currently sized at $100m and provides cover on an annual aggregate basis. The Class 5 annual aggregate notes attach at $1.571 billion of losses.

A Class 7 tranche of notes has not been given a size yet and will also provide cover on an annual aggregate basis for all perils. The Class 7 annual aggregate notes attach at $900m. The Class 7 notes are much riskier therefore and will pay a much higher coupon to investors, we’re told they are unlikely to be submitted for rating.

The Class 3 tranche of notes which will provide per-occurrence coverage have been rated ‘BB-’ while the Class 5 notes which provide annual aggregate coverage have been rated ‘BB’. The Class 7 notes which are also annual aggregate will not be rated.

The notes issued cover personal lines losses only for each peril in the covered areas. USAA are retaining at least a 10% share of losses in the attachment layer for the Class 3 and Class 5 notes. The minimum net loss to USAA from an event so that it will qualify under the terms of the deal is $50m. This will help to appease investors about the severe thunderstorm cover included as many events will not be covered under this deal with the minimum loss size in the terms.

S&P reveal some detail on the historical modelling that has been done for this transaction. For the Class 3 notes, for hurricane, there have been no recorded historical events since 1900 with losses that would have reached the attachment level, and for earthquake, there have been no recorded historical events since 1800 with losses that would have reached the attachment level. According to S&P the events that generated the greatest ultimate net losses were the 1906 San Francisco earthquake ($1.956 billion), the 1812 New Madrid earthquake sequence($1.782 billion), the 1938 “Northeast Clipper” hurricane ($1.589 billion), and the 1886 Charleston earthquake ($1.539 billion).

For the Class 5 notes, when combining hurricane, earthquake, and winter storm, on a historical basis there have not been any years with aggregate losses that would have reached the attachment level. The three years with the largest estimated aggregate ultimate net losses were 1954, 2004, and 2005, with loss estimates of $943 million, $782 million, and $775 million, respectively. Even the 2011 season of severe thunderstorms and tornadoes is said not to hit the attachment point for the aggregate notes.

Hurricane cover is for Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, West Virginia, and the District of Columbia. Earthquake cover if for all 50 states and the District of Columbia. Earthquake cover includes fire following except for in Alaska and Hawaii. Severe thunderstorm and winter storm cover is in the 48 contiguous states. Wildfire cover is for California only.

Proceeds for the sale of the cat bond notes will be deposited in a different reinsurance trust account for each tranche of notes and invested in highly-rated Treasury money market funds.

Update: We now have details on the total size of this Residential Reinsurance 2012 Ltd. cat bond as well as detials on the coupon its notes are expected to pay.

The Class 3 tranche will be $50m, the Class 5 tranche has grown slightly to $110m and the Class 7 tranche of notes will be $40m, making the overall deal size $200m.

We’ve also been told what coupon the tranches of cat bond notes will pay to investors. The Class 3, per-occurrence notes will attach at $2 billion of losses, exhaust at $2.8 billion and will pay a coupon of 10% above Treasury money market yields. The Class 5 tranche of annual aggregate notes attach at $1.571 billion of losses, exhaust at $1.975 billion and will pay a coupon of 8%. The Class 7 annual aggregate notes attach at $900m, exhaust at $1.05 billion and will pay a coupon of 22% given their much riskier profile.

The deal completed on the 31st May and the three tranches of notes and the five year program were listed on the Cayman Islands Stock Exchange.

S&P affirmed the ratings of the Class 3 notes at ‘BB-’ and the Class 5 notes at ‘BB’. S&P also revealed that the Class 3 notes cover 6.25% of ultimate loss between the attachment point and exhaustion point while the Class 5 notes cover approximately 27.23% of ultimate net loss between the attachment point and the exhaustion point. We don’t have that detail for the Class 7 notes.

Update (19th July 2012): Two severe thunderstorm events have caused qualifying UNL losses under the terms of this cat bond deal, affecting the Class 5 annual aggregate notes. The two catastrophe events which have qualified under the terms of the deals are Catastrophe Series 77 and 78, two severe thunderstorm events (so including damage from tornadoes and hail we believe). These events have resulted in ultimate net losses of $95m and $45m respectively to USAA. This reduces the attachment point of the notes slightly making them more risky.

Standard & Poor’s said that it has lowered its ratings on the Residential Reinsurance 2012 Ltd. (Series 2012-1) Class 5 notes to ‘BB-’ from ‘BB’, and placed them on CreditWatch with negative implications.

Update (24th October 2012):

S&P have upgraded the Class 5 notes back to their original rating of ‘BB’ due to improved loss experience. Some of the loss estimates which had originally qualified have been reduced, dropping Catastrophe Series 78 from being a qualifying event. Based on the reduced probability of attachment this results in, the rating downgrade was reversed.

Update (16th November 2012):

The Class 5 notes are back on Creditwatch after USAA released a loss estimate from hurricane Sandy (Catastrophe Series 90) which means the aggregate protection will be eroded further.